Investor Day June 5, 2012

Transcription

1 Investor Day 2012 June 5,

2 Gerald M. Soloway CEO

3 Disclaimer This presentation provides management with the opportunity to discuss the financial performance and condition of Home Capital Group Inc. and Home Trust Company and, as such, may contain forward-looking information about strategies and expected financial results. Various factors, many difficult to predict and to control, could cause actual results to differ materially from results projected in the forward-looking statements. Participants are directed to refer to risk factors described on pages 48 through 58 of the Company s 2011 Annual Report, as well as other publicly filed information. Forwardlooking statements are made in connection with business objectives and targets, Company operations, anticipated financial results and the outlook for the Company, its industry, and the Canadian economy. Accordingly, the audience is cautioned against undue reliance on these remarks. 3

4 DELIVERING OUTSTANDING SHAREHOLDER VALUE FOR 25 YEARS 4

5 25 Years of Outstanding Performance 1986 Recession Employees Equity Assets 12 $3M $50M Weathered the storm

6 25 Years of Outstanding Performance 1998 Assets > $500M 1999 First quarterly dividend Opened branches in Vancouver, Calgary 2001 Assets > $1B

7 25 Years of Outstanding Performance 2002 Opened office in Halifax HCG LISTED ON 2004 Market cap > $1B 2007 Office in Montreal

8 25 Years of Outstanding Performance March 31, 2012 Accelerator Program Employees > 550 Employees > 550 Insured mortgage products Equity $775M Equity $828M Assets $17.7B Assets $18.0B March 31,

9 OUTSTANDING PERFORMANCE 9

10 2012 Market Forecast Real estate Flat Interest rates Economy Modest increases Improving No housing bubble Unemployment Lower 10

11 Positioned for the Future 3 Key Messages Public demand for our products Prudent risk management Operational efficiency 11

12 Positioned for the Future 3 Key Messages Sustained growth Steady if not increased demand for all of our products Prudent risk management Proprietary lending criteria Continued improved operational efficiency Continue to be a low cost operator 12

13 13

14 Robert Blowes, CFO Financial Review 14

15 Agenda Performance review Balance sheet management Outlook 15

16 Record 2011 Results Adjusted net income Adjusted diluted EPS Total assets Return on equity Quarterly dividends Results 30.4% 30.4% 14.0% 27.4% 11.1% Target 15-20% 15-20% 13-18% 20% Increased 13 times over last 7 years 16

17 Continued Strong Momentum Q1, 2012 Net income Diluted EPS Return on equity Results Versus Q1, 2011 $52.5M 21.7% $ % 26.2% Total assets Quarterly dividends $18B $ % 10.0% All business lines had solid growth 17

18 Balanced Focus on Business Segments Net Contribution by Business Segment As at Q Assets by Business Segment Retail Credit VISA Other 3% 4% 9% Other VISA Retail Credit 2% 6% 5% 1% 4% 84% 84% Mortgage Lending 91% 91% Mortgage Lending 18

19 Home Capital Excellent 25 Year Return 5,000% % 19

20 Home Capital Excellent 10 Year Return Value of $100 Investment $1,200 $1,000 $800 Home Capital $983 $600 $400 $200 S&P/TSX Composite Index S&P/TSX Financials Index $ $197 $154 20

21 Agenda Performance review Balance sheet management Outlook 21

22 Strong Capital Base As of March 31, 2012 Risk-Weighted Assets Tier 1 Ratio Total Capital Ratio $4.7B 17.5% 21.6% 22

23 Balance Sheet Management Opportunities IFRS significantly increased Balance Sheet assets Demand exceeds Balance Sheet structure Currently exploring 3 distinct opportunities to free up capacity: 1. Sale of Interest Only Strips (IOS) 2. Whole Loan Sales (WLS) 3. Sale of multi-unit IFRS compliant MBS 23

24 Opportunities to Free up Capacity 1. Sale of Interest Only Strips to Increase Capacity Sale of the rights to retained interest spread of various MBS pools for cash Increased capacity for new balance sheet assets ($500M to $1.5B) Positive margin shift Gain on sale OSFI currently reviewing our plan 24

25 Opportunities to Free up Capacity 2. Whole Loan Sales Provide Upside on Renewal Originate and sell 5 year mortgages Continued service revenue Increased broker channel activity Upside on renewal Consistent with OSFI s published guidance 25

26 Opportunities to Free up Capacity 3. Sale of IFRS Compliant Multi-Residential Mortgages Insured multi-unit residential loans Meets IFRS requirements for off-balance sheet Gain on sale treatment Currently accumulating inventory Balance sheet management opportunities will address these constraints 26

27 Agenda Performance review Balance sheet management Outlook 27

28 Positive Outlook as we Continue to Execute our Proven Business Model Quality Core Mortgage Origination Solid performance Alternative Revenue Source Balance Sheet Management Strategy 28

29 Keys for Continued Success Asset growth Operational execution Teamwork 29

30 IN SUMMARY Positioned For Success Record of outstanding earnings and growth Balance sheet opportunities Positive outlook going forward Focus on the keys to success 30

31 31

32 Kerry Reinke VP, Chief Risk Officer

33 Agenda Profile of Home Capital borrowers Portfolio credit quality Risk Management approach Capacity to absorb stress 33

34 Three Primary Segments of Home Capital Borrowers Self Employed New Immigrants Bruised Credit 34

35 Self-Employed A Financially Sound Market # Self-employed Canadians 2.7M 16% of workforce, and growing Net worth $520K 2.7x wealthier than paid employees HC portfolio 50% Home Capital portfolio Source: StatCan.gc.ca/pub/ x/ /article/11535-eng.pdf 35

36 Self-Employed Over 50% in Top Quartile of Household Net Worth Distribution Across Quartiles of Household Net Worth % 60 Paid employees Self-employed Bottom quartile 2nd quartile 3rd quartile Top quartile Source: StatCan.gc.ca/pub/ x/ /article/11535-eng.pdf 36

37 Agenda Profile of Home Capital borrowers Portfolio credit quality Risk Management approach Capacity to absorb stress 37

38 Portfolio Well-Positioned for Current Economy 56% Insured 44% Loan to value ratio <70% Non-performing loans and losses low 38

39 Credit Quality is Stabilizing Within Targets Following the Renewed Emphasis on the Classic Product Gross Impaired Loan Ratio (bps) Gross Impaired Loan Ratio (Bps) BPs of Gross Loans Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q

40 Credit Quality is Stabilizing Within Targets Following the Renewed Emphasis on the Classic Product Allowance for Credit Losses Ratio (bps) Total Collective Specific Stabilized provision for credit losses in the low 20 bps range 40

41 Minimal Loan Losses Net Write-off Rate (bps) BPs of Gross Loans Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q

42 Agenda Profile of Home Capital borrowers Portfolio credit quality Risk Management approach Capacity to absorb stress 42

43 Risk Appetite Framework Define Mission & Governing Objective Identify Risk Capacity Define Business Strategy Establish Risk Taking Philosophy Articulate Risk Appetite Establish Risk Limits 43

44 Risk Appetite Framework Define Mission & Governing Objective Identify Risk Capacity Define Business Strategy Establish Risk Taking Philosophy Articulate Risk Appetite Establish Risk Limits 44

45 Risk Appetite Framework Define Mission & Governing Objective Identify Risk Capacity Define Business Strategy Establish Risk Taking Philosophy Articulate Risk Appetite Establish Risk Limits 45

46 Integrated Risk-Taking Philosophy Tightly Aligned with Home s Core Strategy We seek to reduce overall risk exposure to a low level through: 1. Active Board and senior management engagement 2. Company-wide promotion of a sound risk management culture and awareness 3. Adoption of a conservative financial risk profile 4. Extensive, customized risk evaluation practices and controls at the transactional level 5. Proactive, independent and timely monitoring and assessment of all risk exposures, regardless of source 46

47 Risk Appetite Framework Define Mission & Governing Objective Identify Risk Capacity Define Business Strategy Establish Risk Taking Philosophy Articulate Risk Appetite Establish Risk Limits 47

48 Risk Appetite Framework Define Mission & Governing Objective Identify Risk Capacity Define Business Strategy Establish Risk Taking Philosophy Articulate Risk Appetite Establish Risk Limits 48

49 Transactional Risk Management: The Foundation of our Business Model Property Qualifications Borrower Qualifications Appraisals on all mortgages Independent site inspections LTV based on appraisal evaluation and geographic location Beacon score / Credit history Employment / Income Debt service capacity Risk Adjusted Pricing 49

50 Risk Management Model in Action: Three Lines of Defense 1 Business Units Taking, managing and monitoring risk 2 Enterprise Risk Management Providing policy, guidance and analysis 3 Internal Audit Providing independent assurance 50

51 Enterprise Risk Management: Second Line of Defense Board and Senior Management Business Support Potential unexpected losses Expected losses Home s ability to absorb events ERM: Support + Objectivity Risk measurement Risk assessment Portfolio analysis and monitoring Insight to support business decisions 51

52 Agenda Profile of Home Capital borrowers Portfolio credit quality Risk Management approach Capacity to absorb stress 52

53 Significant Capacity to Absorb Stress Internal Testing Rigorous internal stress testing and scenario analysis Capital Income statement Portfolio Key Parameters 30%-45% downturn in real estate Elevated unemployment, GDP growth contraction Substantial rise in interest rates Home Capital remains adequately capitalized and has the capacity to weather the storm 53

54 IN SUMMARY Risk Managed Strictly on All Levels Focus on lower-risk borrowers Improving portfolio credit quality Solid risk management, with three lines of defense Significant capacity to absorb stress 54

55 55

56 Break

57 Panel Discussion Brian Mosko, Chief Operating Officer Sanjiv Purba, Chief Information Officer Don Correia, VP & Chief Credit Officer

58 Questions

59 Cathy Boon VP, Retail Credit Services

60 Agenda Retail Credit Services business overview Market positioning Future growth 60

61 Retail Credit is a Profitable and Growing Business Retail Credit Services provides financing to dealers for their customers $190M outstandings for 164,000 accounts as at March 31, 2012 Assets are 1% of Home Capital and Net Interest Income Contribution was 4% during Q $M $160 $120 $80 $40 Growth in Originations Bulk Purchase $ Launched: April 2001 from zero base 61

62 A Diversified Mix by Asset Class Loans by Asset Class 2012 Receivables Originations Home Improvement HVAC 16% 11% Food 4% 69% Hot Water Tanks Home Improvement Food 14% 13% 44% Hot Water Tanks HVAC 29% 62

63 Portfolio Characteristics: High Margin, Low Risk, Small Ticket Items Range Weighted Average Average Ticket Size for Hot Water Tanks Average Ticket Size for all other Business $750 1,500 $778 $1,000 $35,000 $4,650 Weighted Average Yield 7.99% 11.99% 9.00 yield % Term (Months) months 60 months 63

64 Strong Financial Profile 2011 Revenues Net interest contribution $13.7M $10.3M Overall Spread 7% Lending approach Secured Conservative Average beacon score 702 Average delinquency 90+ days 0.14% Delinquency of hot water tank customers 0% Write-offs 0.24% 64

65 Diversified Range of Customers Network of approximately 800 dealers 65

66 Agenda Retail Credit Services business overview Market positioning Future growth 66

67 Dedicated And Focused Service Full service unit including sales, underwriting, servicing and collections Relationship focused selling Customer service oriented, experienced internal team Experienced sales team with an understanding of the marketplace 67

68 Strong Record of Growth Receivables ($M) (as of Q1 2012) Number of Accounts (K) (as of Q1 2012) Q Q

69 Agenda Retail Services business overview Market positioning Future growth 69

70 Positioned in a Large Home Improvement Market with Growth Opportunities $48B home improvement industry in Canada Average project cost $11,000 $15,000 Opportunity to expand business into fixtures flooring, roofing Fixtures are those items permanently attached to the property and under Ontario and other Provincial laws we can register lodgment against the property Large opportunity to expand the hot water tank business 3M customers, our market share: 5% Geographic expansion beyond Ontario Net contribution and receivables: 25 30% projected growth in

71 SUMMARY A Profitable, Growing Business Attractive profile: High margin, low risk, diversified Record of controlled and profitable growth Large growth opportunity in home improvement market 71 71

72 72

73 John R. K. Harry SVP, Commercial Mortgage Lending

74 Agenda Overview of our commercial portfolio Our business approach Achievements to date Opportunities going forward 74

75 Profile of Our Non-Residential Mortgages (at the end of Q4/11) Total outstanding balance $946M Average spread 3.5% Gross impaired loans 0.09% Risk Performance Returns Low Good High 75

76 Non-Residential Mortgages A Diversified Portfolio (at the end of Q1/12) By Type By Geography Construction 6% Store / Apt 38% Alberta 2% Other 3% Quebec 4% Conventional (Retail, Office, Industrial, etc.) 56% Ontario 91% By Maturity By Amount 3-5+ years 11% Over $20M 12% 1-3 years 38% Under 1 year 51% $10-$20M 7% $1-$10M 28% Under $1M 53% 76

77 Profile of Multi-Unit Residential Mortgages Conventional (at the end of Q1/12) Total outstanding balance $131M Average spread 3.7% Gross impaired loans 0.0% Risk Performance Returns Lower Good High 77

78 Profile of Multi-Unit Residential Mortgages Insured & Securitized (at the end of Q1/12) Total outstanding balance $2,015M Average yield 4.3% Gross impaired loans 0.0% Risk Performance Returns Lowest Good Good 78

79 Agenda Overview of our commercial portfolio Our business approach Achievements to date Opportunities going forward 79

80 Our Philosophy Focused on credit quality and profitability Carefully select our commercial mortgage loans Focus on good opportunities in the marketplace, not driven by the need to do high volumes 80

81 Our Operational Approach Two distinct segments which differ in size, borrower sophistication and complexity of transactions 1. Small commercial mortgages --- loans up to $1,250, Mid-size commercial mortgages --- loans over $1,250,000 Operations are aligned with each segment to provide best service to borrowers and brokers 81

82 Agenda Overview of our commercial portfolio Our business approach Achievements to date Opportunities going forward 82

83 Built a Commercial Portfolio with Strong Characteristics Well diversified (i.e. by product type, geographically, etc.) Proven payment history Strong performing with low arrears Very profitable 83

84 Agenda Overview of our commercial portfolio Our business approach Achievements to date Opportunities going forward 84

85 Many Growth Opportunities Going Forward Well connected in Canadian commercial mortgage community continue to see a steady flow of good opportunities Current uncertain market is an opportunity less competition, more attractive transactions Targeting to grow the commercial portfolio 15-20% YoY, with low risk and good yield (i.e. 3 ½%) 85

86 Q & A 86

87 87

88 Pino Decina SVP, Mortgage Lending 88

89 Residential Mortgages: The Core of Our Business Assets Interest Income 9% 14% 91% 86% Residential Other Residential Other 89

90 Agenda Strengths we are building on Housing market overview Long growth runway 90

91 The Secret To Our Success Underwriting: A Powerful Differentiator Other financial institutions primarily rely on automated underwriting We take a hands-on approach Leverage proprietary lending model Conduct manual, thorough, customized adjudication process Emphasis on property and collateral analysis in order to mitigate higher risk Superior underwriting processes to manage our risk 10+ years average experience per underwriter 91

92 The Secret To Our Success Consistent and Positive Customer Experience Personalized processes Sales BDMs foster broker relationships Experienced internal teams with deep understanding of alternative lending market Response to new deals within 24 hours 92

93 They Come from Many Places We Understand B Clients Better than Anyone Life-changing events New to Canada, illness, job loss, divorce Bruised credit Over-extended unsecured debt, identity fraud Income verification challenges Self-employed, non-verifiable income, lack of employment tenure, commissioned income Multiple home ownership 93

94 Broad Network of Brokers Critical to Our Success Approximately 15,000 active mortgage brokers across Canada Originate 85% of Home Capital mortgages Brokers Bank Referrals 94

95 Recognized Achievements by Our Brokers in 2012 Lenders Survey 2012 CMP Awards Awarded 3 Medals Nominated for 5 Awards: 1 Winner 95

96 Agenda Strengths we are building on Housing market overview Long growth runway 96

97 Canada Remains in an Enviable Position Balanced supply and demand Low unemployment Solid real estate fundamentals Consumers servicing debts 97

98 Banks are Adapting to the Changing Landscape Mortgage Lending is Tightening Proactively tightening their lending guidelines Tighter income and credit qualifications Pulling out of the broker-referred mortgage space Banks tightening lending Home Capital opportunity Resulting in more new deals for Home Capital 98

99 Agenda Housing market overview Strengths we are building on Long growth runway 99

100 Long Growth Runway in Canada 1. Capitalize on large market opportunity 2. Grow in non-prime market 3. Expand in prime market 4. Geographic expansion 5. Leverage and deepen customer relationships 100

101 1. Capitalize on Large Addressable Market Total Canadian Mortgage Market $1.2 trillion Target Market $240B Home Capital Share $6B or 2.5% Lots of room for growth 101

102 2. Grow in Non-Prime Market Our Core Business Non-Insured Mortgage Originations $2.85B $3.51B 23.2% Our core, highly profitable business Strengthened credit performance Up 22.2% Q1,

103 3. Expand in Prime Market As Gap Between Bank & Insurer Guidelines Widens Bank Guidelines Insurer Guidelines Home Capital Classic Mortgage Accelerator Prime Underserved Prime Creates more opportunity to grow 103

104 3. Expand in Prime Market Reinvigorating Accelerator Program Mortgages insured against loss as long as underwriting criteria met In the event of a default, Home Capital is made whole by: Will offer Accelerator Program while evaluating profit enhancements 104

105 4. Measured and Deliberate Regional Targeting Growth potential balanced with risk management 105

106 5. Leverage and Deepen Existing Relationships Support and education 5,000 Expanded product offering 56,000 Mortgage Brokers across Canada Home Capital Customers 106

107 IN SUMMARY Home Capital is Well Positioned for Sustained Growth Leader in our niche market Proven track record Multiple drivers to support sustained growth Unmatched strengths and expertise in our segment 107

108 108

109 Kevin Smith Chairman of the Board 109

110 Martin Reid President

111 Consistent and positive performance history Record Results in 2011 Growth in net income 30.4% Return on Equity 27.4% Number of consecutive years ROE > 25% 9 years Disciplined risk management, strong service focus and opportunistic approach within each business unit 111

112 The Keys to Our Success Sustainable and Profitable Growth 1. Capitalize on market opportunities Regulatory changes providing strong quality opportunities 2. Expand geographic reach Growth in Quebec, Manitoba, Southwest Ontario 3. Deepen customer relationships and market penetration 112

113 The Keys to Our Success Prudent Risk Management 1. Prudent risk management strategies across all business lines 2. Defined risk appetite framework with full board support and strong governance structure 3. Strength in proprietary underwriting system 4. Proven capacity to absorb stress conservative business model strong capital and liquidity levels 113

114 The Keys to Our Success Improved Operational Efficiency 1. Maintain optimal efficiency ratios Operational effectiveness group 2. Centralized operations Manage all aspects of mortgage servicing internally 3. Investment in technology First full SAP banking platform to go live in North America. 4. Strong leadership and continued talent development Our people are our strength 114

115 Solid plan to continue the strong momentum Capitalize on balance sheet opportunities Solid read on real estate fundamentals: No housing bubble Execute on our proven disciplined business model Expand our market opportunities across all business units 115

116 Well-positioned to achieve 2012 results Q Results Versus Q Targets Net income $52.5M 21.7% 13-18% Diluted EPS $ % 13-18% Return on equity 26.2% 20% Total assets $18B 12.4% 13-18% Quarterly dividends $ % All business lines show solid growth 116

117 Questions

118 Investor Day 2012 June 5,